VAT Domestic Reverse Charge

[edit] Introduction

Value Added Tax (VAT) is a tax added to the cost of certain goods and services. It is only accountable where the party raising an invoice is VAT-registered. Parties must register if their VAT-able turnover exceeds a minimum threshold.

In June 2018, the government launched a consultation on the introduction of a VAT reverse charge for construction services to tackle fraud in the construction industry. This was originally intended to come into effect on 1 October 2019, however following lobbying it did not actually come into effect until 1 March 2021

The reverse charge enables a customer to charge themselves VAT rather than the supplier charging it. This removes any opportunity for the supplier not to pay HMRC (missing trader fraud).

The reverse charge applies to businesses that supply services to another business that will then sell on that service, but not those that supply services to consumers.

Sometimes referred to as the domestic reverse charge, it applies only to supplies of specified construction services which are subject to the standard and reduced rate of VAT, which include:

• Construction, alteration, repair, extension, demolition or dismantling of buildings, structures, non-permanent structures, offshore installations, works forming part of land (i.e. walls, runways, docks, railways, pipelines, etc.).
• Installation of systems such as heating, lighting, air-conditioning, ventilation, drainage, and so on.
• Internal cleaning of buildings and structures.
• Painting and decorating.
• Services which are an integral part of preparing or completing those above (e.g. site clearance, excavation, scaffolding erection, landscaping, and so on).

Services and supplies that are excluded from the reverse charge include:

• Drilling and extraction of oil, natural gas, and minerals.
• Tunnelling and boring for underground works.
• Manufacture of building or engineering components and machinery.
• Signage and advertisements.
• Installation of seating, blinds, shutters, etc.
• Installation of security systems and alarms.

Ref https://www.gov.uk/government/consultations/draft-legislation-vat-reverse-charge-for-construction-services

More information about the reverse charge can be found at: https://www.gov.uk/guidance/vat-reverse-charge-technical-guide

[edit] Criticism and delay

In July 2019, the Federation of Master Builders called for a six-month delay following research that found more than two thirds of construction SMEs had not even heard of the reverse charge.

In September 2019, following strong lobbying by the construction industry the government announced that the reverse charge would not be introduced until 1 October 2020, stating:

Ref https://www.gov.uk/government/publications/revenue-and-customs-brief-10-2019-domestic-reverse-charge-vat-for-construction-services-delay-in-implementation/revenue-and-customs-brief-10-2019-domestic-reverse-charge-vat-for-construction-services-delay-in-implementation

In June 2020 the Government delayed the introduction of reverse charge VAT by a further five months until 1 March 2021 due to the Coronavirus pandemic. Despite continued lobbying to push back this date further, the reverse charge was introduced on 1 March 2021.

Andy Mitchell, chairman of the Construction Leadership Council said: “The implementation of Reverse charge VAT will restrict cashflow in our industry, especially to the smallest firms, at an extremely critical financial period for many businesses. This policy risks reversing any recovery industry has made from Covid-19 and will limit the scope for protecting and creating jobs across the UK.”

[edit] Implementation

In Novermber 2021, subcontractors complained that they were waiting too long to to receive VAT repayments. An HMRC spokesperson said: “HMRC aim to make VAT repayments within 30 calendar days of receiving a return. In most cases claims are paid within five working days of receipt of the return. However, if we select it for verification checks, this could take 30 days or longer, dependent upon how long it takes the customer to provide the information requested to verify the return.”

[edit] Related articles on Designing Buildings

• Business rates.
• Capital gains tax.
• Construction invoice fraud.
• Construction VAT.
• Invoice.
• Limitation of action.
• Suppliers.
• Supply chain management.
• VAT - Option to tax.
• VAT - Protected Buildings.